Biz dreads economics test

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As the U.S. economy faces a swirl of negative forces, the film-financing world is set to endure its own perfect storm.

And like the economy, things could get a lot worse before they get better.

Much of the focus has in recent months been the fate of slate funds such as Dune and Gun Hill as Wall Street wrings its hands over its lack of selection and low batting averages.

But so-called single-picture financing — which encompasses films ranging from the smallest indie to a $60 million star vehicle — is going through its own turbulence. Projects that would have sailed through easily a year ago are stalled in development. Movies that are practically in preproduction are falling apart at the eleventh hour.

A number of problems, many of which could soon be deepening, are to blame for a contraction that already is under way.

Most evidently, skittish equity investors who once thought nothing of dropping a few million into a project are becoming a lot tighter with their money, while the overall number of equity investors is starting to drop.

Almost as dramatic is the change in debt financing, the means by which much of a film's budget is covered. Money is either too expensive — interest rates have soared from the neighborhood of 10% to 20% for many films — or impossible to get in the first place.

To top it off, a barren foreign-sales market — some call the recent Berlin market the worst in many years — is dinging the financing world. Producers can't finance most pictures without foreign presales, and foreign presales help cover much of the debt in what's known as Gap/Supergap financing. If a project can't be presold and risk limited, financial institutions such as Aramid and Newbridge Partners who provided this funding become more reluctant to lend.

For, say, a $10 million project, $5 million may come from debt financing, $3 million from equity investors and the rest from state grants and tax rebates.

But with the debt market prohibitive, equity investors tight-fisted and foreign sales languishing, film-finance pipelines are starting to close up.

"At this rate, you'll have Connecticut and New Mexico as the only financiers on some of these pictures," said one financing wag, only half-joking.

Projects across the spectrum already have been affected.

One producer who's behind some of the bigger indie crossovers had his movie, a $5 million drama with a noted director, fall apart just as it was ready to go into preproduction.

"I've been producing movies for a long time, and I've never seen that happen before," he said. The producer has since sought studio backing, and while several prospects have emerged, a deal has yet to materialize.

Meanwhile, at the agencies, a number of promising packages have struggled.

The Oliver Stone-Antoine Fuqua biopic about Pablo Escobar was set to go until it became clear the financing wasn't ready. At CAA, a Tim Robbins directorial project called "The Heretic" fell apart for reasons likely connected to financing.

The dead zone for single-picture financing lies in the $3 million-$10 million budget range. That's the area in which pictures require too much money to be covered easily with state money and the odd equity investor but not enough money that they'd have sufficient upside to attract bigger equity and debt players. Once a budget increases beyond $10 million — in a "more money, less risk" paradox — it gets easier.

For these and other pics, the question remains: How much of a shakeout is on its way?

Big Beach, River Road and Participant are among the steadier players in the single-picture financing game, and all have had at least one or two hits during the past few years. Meanwhile, newer entities like Media Rights Capital earn high marks from insiders.

But the news that Sidney Kimmel Entertainment will reduce its operations has been one sign that the market could get worse. While some tried to write off the company as an anomaly because Kimmel himself made his money outside the film business, the scaling back could bode darker times.

"SKE made exactly the kinds of movies that other companies make," said one film-financing insider, "and that the foreign market says it doesn't want."

There are other ominous signs. After a rocky end of 2007, some were expecting a foreign-sales rebound in Berlin. That didn't happen, and nervous producers and financiers are hoping — but not expecting — a rebound at Cannes. Foreign buyers also work with an informal list of sales agents they deem acceptable because of their track record; with the market in a tailspin, that number is rapidly diminishing, which in turn could hit foreign presales even harder.

Much of the problem with the market lies with the dark dramas that have been a hallmark of the indie world for the past two decades. While the foreign market used to eat them up, they've recently turned a cold shoulder.

In fact, the foreign famine already is prompting changes.

"What we tried to refocus is making bigger films with more potential overseas and more commercial potential," William Morris Independent's Cassian Elwes said. He cited the Michael Martin package "Brooklyn's Finest," a movie with stars and thriller elements, as an example.

On the equity side, the problems could intensify as the rest of the economy worsens. Films are considered a growth stock, and those are generally the first to be shed from portfolios during a recession.

The finished-film business has an added concern: The festival market has been soft for domestic rights, too. When the going rate of a Sundance pic was $3 million or $4 million, as it was in 2006 and early 2007, equity investors want in. When movies go for a lot less or don't sell for theatrical at all, they don't.

Still, some who note the crowded release schedule of the past few years say a film-financing shakeout may be a welcome development.

"I think as we go into a tougher economy, some films won't get made and probably shouldn't get made," Elwes said.

As a recession comes, consumers will have less money to spend at the movies — and soon, perhaps, fewer movies to spend money on.